Big Alcohol Is Big In Tax Schemes
I’ve spent the recent days reading articles and watching documentary films about the Paradise Papers – in three different languages covering the issue from different national angles and interests. It’s a gloomy picture of corporate practices of tax avoidance and evasion that emerges. These practices undermine the very foundation of our societies.
But let’s start from the beginning to see what we know so far.
The International Consortium of Investigative Journalists (ICIJ) has released the so called The Paradise Papers, a global investigation that reveals the offshore activities of some of the world’s most powerful people and companies, including Big Alcohol corporations, as they scheme to avoid paying their fair shares of taxation.
The ICIJ together with 95 media partners explored 13.4 million leaked files from a combination of leaked data from offshore law firms and the company registries in some of the world’s most secretive tax havens. Among the documents leaked is information again showing that alcohol companies are scheming aggressively and unethically to avoid taxation.
For Big Alcohol, leaks exposing their unethical tax schemes are not new.
Lux Leaks revelations about Big Alcohol
Already the infamous Lux Leaks showed how alcohol companies scheme to avoid paying their fair share of taxes. Leaked documents of more than 350 companies showed in 2014 that one of the EU’s smallest countries helped multinational corporations, including AB InBev, UNIBRA, and Moët Hennessy, save millions in tax, to the detriment of ordinary people and the government services they rely on.
ICIJ’s Luxembourg Leaks investigation (more than 80 journalists in 26 countries, worked in close in collaboration for more than six months scrutinising the leaked papers) is based on a confidential cache of secret tax agreements approved by Luxembourg authorities, that provide tax-relief for more than 350 companies around the world. I think it’s important to highlight that the private deals are legal in Luxembourg, but nevertheless highly unethical.
The cache of almost 28,000 pages of leaked tax agreements, returns and other sensitive papers relating to over 1,000 businesses show that major multinational corporations have used complex webs of internal loans and interest payments which have slashed the companies’ tax bills. These documents show how specially-designed corporate structures were arranged in coordination with the Luxembourg authorities. The businesses include corporations such as Pepsi, Amazon, Ikea, Accenture, Burberry, Procter & Gamble, Heinz, JP Morgan, Deutsche Bank and FedEx.
And some of the biggest alcohol producers in the world have also joined the tax avoidance bonanza.
“Unibra” is a Belgium based company operating in the African alcohol market, operating in countries like Guinea, Dr Congo and Madagaskar.
Le Soir reported that Unibra used a scheme that gave it an 80% tax exemption thanks to Article 50 bis of the Income Tax Law in Luxembourg which exempts to 80% “income received as remuneration for the use of copyright in computer software, patent, a trademark, a domain name, a design or a model “.
Unibra holds the licenses of the Skol beer brand for Africa. To avoid taxation, they schemed to create a new Luxembourg company (called SDA) to which they resold all Skol licenses. In return, SDA agreed to pay an annual fee of €88,000 over 30 years to the two companies where the licenses were stored before.
Find the Lux Leaks documents here.
Example Moët Hennessy
“LVMH Moët Hennessy Louis Vuitton SE“, better known as LVMH, is a French multinational luxury goods conglomerate, headquartered in Paris. The company was formed in 1987 under the merger of fashion house Louis Vuitton with Moet Hennessy, a company formed after the 1971 merger between the champagne producer Moët & Chandon and Hennessy, the cognac manufacturer. All in all LVMH controls about 60 subsidiaries that each manage a small number of expensive brands. The oldest of the LVMH brands is wine producer Château d’Yquem. Diageo, the world’s largest liquor producer is a major shareholder in Moët Hennessy.
The Lux Leaks files show how the company schemed to set up a separate entity in order to avoid paying taxes – with the help of the authorities in Luxembourg.
Example Anheuser-Busch InBev
AB InBev is the world’s biggest beer producer. It’s a massive multinational corporation with global headquarters in Leuven, Belgium. Through a historic mega-merger, the corporation grew even bigger in October 2016 when AB InBev conclude the purchase of SABMiller. It was the world’s largest brewer even before the acquisition of SABMiller and is considered one of the largest fast-moving consumer goods (FMCG) companies in the world. The estimated annual sales for the company in 2017 will be US$55 billion.
And still, the doctrine of profit-maximization compels them to scheme aggressively in order to avoid taxes.
Their scheme relies on a fake mailbox company in Belgium, deals with the tax authority there, another fake company in Luxembourg and arrangements with the authorities in Luxembourg.
The Belgian newspaper De Tijd reports that the extent of tax benefits due to the Luxembourg construction is unclear, but the leaked documents show “how smooth the Luxembourg tax can be. AB InBev does not want to explain the construction, and only emphasizes that the group complies with local tax rules in all countries.”
However, in Belgium, the figures amount to a tax rate of less than 4% over a three year period, while the constructed company “Ampar” generated €140 million in the same period.
From Lux Leaks to Paradise Papers
Lux Leaks was in 2014. After a massive leak in 2016, the so-called Panama Papers, we have another gigantic leak this week.
The Paradise Papers documents include nearly 7 million loan agreements, financial statements, emails, trust deeds and other paperwork over nearly 50 years from inside Appleby, a prestigious offshore law firm with offices in Bermuda and beyond.
The Paradise Papers reveal offshore interests and activities of more than 120 politicians and world leaders, including Queen Elizabeth II, head of state of the United Kingdom. Her private estate invested in a rent-to-own loan company accused of predatory tactics.
The leaked files from Appleby, the offshore law firm, include details of tax planning by nearly 100 multinational corporations, including Apple, Nike and Uber. And, of course, Big Alcohol corporations.
Paradise Papers: Diageo and United Spirits
United Spirits Limited, abbreviated to USL, is an Indian alcohol company, and the world’s second-largest liquor company by volume. It is a subsidiary of Diageo, and headquartered at UB Tower in Bangalore, Karnataka.
Diageo is a British multinational alcohol company, with headquarters in London. It is the world’s largest distiller and also owns 34% of Moët Hennessy.
Big Alcohol is heavily implicated in new revelations from the Paradise Papers.
Shady people, questionable transactions
Paradise Papers investigated by The Indian Express show that after Vijay Mallya sold his USL to Diageo in 2013, Diageo approached a London-based law firm, Linklaters LLP, to undertake a massive restructuring exercise to simplify the complex structure of USL created by Mallya.
One reason for the complexity of the holding structure, records show, was a single objective — allegedly diverting funds through USL Holdings Ltd (BVI), an entity in a tax haven (British Virgin Islands); and three subsidiaries in the UK. These were USL Holdings (UK) Ltd; United Spirits (UK) Ltd and United Spirits (Great Britain) Limited (UK).
Documents from Appleby, which worked with Linklaters on the restructuring, show that funds amounting to over $1.5 billion were funnelled, as debt, into these four subsidiaries over a period of seven years till 2014.
Two years after they bought USL, Diageo undertook a restructuring process to get rid of these three intermediate subsidiaries and thus ended up waiving the $1.5-billion debt owed by these subsidiary companies. Records also show that Diageo, as part of the restructuring exercise, absolved Watson Limited, an entity owned by Mallya in his personal capacity, of its dues of ca. $5.8 million to a USL group company through an exercise called novation — substituting one party in a contract with another, or replacing one debt or obligation with another.
Per The Indian Express reporting, Diageo approached Linklaters LLP for the restructuring process, that in turn approached Appleby and sought assistance in getting authorizations for the Mauritius-based Watson Ltd to complete the transaction. Appleby documents confirm Diageo’s intent: “the purpose of the Reorganisation is to settle the inter-company loan balances.”
The allegation is that the United Spirits subsidiaries – located in tax havens – were used for laundering $1.5 billion raised as debt between 2008 and 2014. Diageo, after acquiring USL in 2012, restructured these subsidiaries and wrote off the money.
A study of the money trail suggests that the leaked information alludes to the fully-leveraged buyout of Scotch whisky maker Whye & Mackay by USL in 2007. Mallya had borrowed $1.2 billion for the acquisition, routed through several intermediate subsidiaries.
Government probe looming
Later, USL deployed more money to service the debt. After acquiring USL, Diageo divested Whyte & Mackay at a deep discount possibly leading to a substantial write-off in 2014.
Enforcement Directorate (ED) officials are now studying the leaked documents to assess whether they will pursue a money-laundering probe.
Paradise Papers: AB InBev
With a fortune of $31.2 billion and as the 26th richest person in the world, Jorge Paulo Lemann is drawing attention for being implicated in the Paradise Papers. He is the co-founder of 3G Capital, an American-Brazilian multibillion-dollar investment firm, and shares control of AB InBev with his billionaire partners Marcel Telles and Carlos Sicupira.
Leman is one of the key people responsible for the formation of the world’s largest brewer.
Pursuing market domination
In the early 2000s, he bought control of two Brazilian breweries (Brahma beer and Companhia Antarctica Paulista) that became AmBev. By 2004, AmBev controlled 65% of the Brazilian beer market and almost 80% of Argentina’s, with monopoly positions in Paraguay, Uruguay, and Bolivia. Subsequently, AmBev merged with Interbrew of Belgium in August 2004. The stock of the combined firm, InBev, rose 40% during 2005. InBev then announced it would buy the American brewer Anheuser-Busch in 2008 for $46 billion in a highly controversial deal, making it the world’s largest brewer, Anheuser-Busch Inbev securing Lemann’s status as one of the new “Kings” of beer.
And finally, fulfilling Lemann’s fever-dream, in 2016 the ultimate beerhemoth arrived with the historic mega-merger of AB InBev and SABMiller. Since the merger the new beerhemoth is responsible for one in three beers sold worldwide.
Contained in the Paradise Papers are documents listing Lemann and other AB InBev executives — Carlos Alberto da Veiga Sicupira, and Marcel Herrmann Telles — as directors of several of the companies in question. All three are serving on the Board of Directors.
Unethical board of directors
Imagine this: 4 of the 8 board members representing main shareholders are implicated in Offshore Leak scandals. In addition to the three gentlemen now exposed by the paradise Papers, the Lux Leaks (see above) also exposed the de Spoelberch family for unethical tax scheming.
According to Power360, among the companies cited in the Paradise Papers, five are part of the shareholder structure of AB InBev.
Big Alcohol’s track record of tax scheming
This is not the first time that AB InBev has been implicated in unethical business practices involving tax schemes.
- In January 2016, AB InBev was found by the European Commission to have received illegal tax breaks in Belgium.
- An investigation into SABMiller’s tax practices in Africa found that SABMiller avoids tax across Africa and India, for example in Ghana not paying any taxes over a 2-year period.
- Leading up the the Football World Cup in Brazil in 2014, AB InBev used Fifa to pressure the Brazilian government in order to change a law to curb violence that banned alcohol in and around football arenas. At the same time the company would be exempted from paying taxes from the time the event was awarded till the end of the competition.Federal Revenue Department officials calculated that the federal tax breaks associated with the world cup would total about $475 million between 2011 and 2015.
But it’s not “only” the world’s largest beer company. It’s also the world’s largest liquor company. And many more.
The problem is clearly systemic and build into the alcohol industry. Big Alcohol pursues profits ruthlessly, shamelessly employing unethical business practices.
Also Diageo has been implicated in unethical business practices involving tax schemes.
- Bribery and tax schemes in India
- Tax schemes in South Korea
- Tax avoidance in France
- Tax avoidance in the UK
- Bribery and tax schemes in Thailand
All these cases are well-proven and documented but likely only are the tip of the iceberg.
What the Paradise Papers show is that alcohol industry executives think they are above the law. These new leaks show that the alcohol industry is ruthlessly externalizing costs to take home windfall profits, and deliberately scheming to avoid taxation.
It means is that Big Alcohol is leaving societies around the world completely alone with the massive costs from the damage their products cause. In the end, these practices undermine the very fabric and functioning of our societies. When domestic resource mobilization is undermined on this scale and this mercilessly important government functions like providing prevention and treatment for alcohol harm cannot be delivered to the people who need them the most.
In this sense, the leaks reveal more than concrete examples of unethical and anti-social business practices. The leaks also reveal the true face of a rogue industry.
Governments must do more to curb Big Alcohol and promote tax justice
All these leaked documents in general and the Paradise papers in particular clearly illustrate that our governments are losing billions through tax schemes around the globe. The weaknesses and shortcoming of the current global tax system is being exploited by a tiny global elite who dodge the civic responsibility of contributing their fair share to society. In this way, the leaks expose the staggering scale of the tax avoidance schemes and evasion tricks which are depriving governments and societies of billions in domestic resources. We could have much more government funding for promoting sustainable development and the achievement of the 2030 Agenda; we could have more funding for health promotion; and we could have more funding to protect and promote the rights and well-being of the most vulnerable and marginalized.
But the Paradise Papers also expose our governments’ feeble attempts to curb harmful business practices of multinational corporations and the wealthiest people on this planet. Little is happening for real change, since the first leaks a few years ago. This is an urgent issue. It affects all of us.
Corporate tax avoidance and evasion adversely affects everyone no matter where they live. It fuels poverty and inequality. When a ruthless global elite of multinational corporate executives scheme to avoid taxation it is ordinary citizens, who pay the price.